Rising costs: when to pass and when to take the pain?

As the cost of living crisis intensifies, everybody is feeling the pinch. Lack of funds and rising prices leave business owners with a dilemma: should they take a hit at the expense of their margins, or pass on rising costs to their already-hurting customers?

Alison Boutoille, who runs a discount initiative called City Stack to help independent pubs, says that businesses have been absorbing price rises themselves to keep squeezed customers satisfied.

For example, seven in ten hospitality businesses saw prices rise during April, but only three in ten increased their own prices. Meanwhile, in the haulage industry, the average price charged to the customer per mile has fallen, despite a 12% increase in diesel costs.

Smaller companies are more vulnerable than larger ones when trying this strategy.

“Big chains may be well equipped to weather the current economic situation, it’s much harder for independents to keep their business afloat,” Boutoille says.

New thinking can help small businesses to cut their cost base. Red Box Web Design moved to a shared office space to remain competitive for customers.

Business owners should put ego aside and make logical decisions.

“Initially, our owner hesitated to downsize the office, considering it a symbol of the team’s hard work over the years. He advises business owners to put ego aside and make logical decisions,” says marketing manager Clare Taggart.

“We’ve successfully reduced our rent expenses and energy consumption has decreased significantly.”

How to pass on the buck

Eventually, though, most businesses find that they must pass on costs. When doing this, look for ways to take away the sting.

1. Reward loyalty

Vic Paterson, who runs State 11 soft tissue massage business in Lancashire, has increased her cost per hour from £30 to £50.

“You can always keep existing clients on the “old” price for a period,” she says. “We also offer a Financial Assistance scheme where people who can’t afford our full fee can ask for a discounted rate.”

2. Show customers some love

Helen Dewdney, consumer expert who writes as  The Complaining Cow, says that customers are happy to pay if their experience is good.

“Almost three times as many customers indicate that they are willing to pay more for excellent service.” Dewdney says, pointing to the results of a recent Institute of Customer Service study. “Businesses would do well to heed this feedback.”

3. Be transparent and honest

Customers may be more willing to stick with you if you explain how inflation is hitting you.

Business owner Hanna Dilley, who was recently forced to raise the price of her toddler food Benji’s Bites, says she was careful to explain to her customers why and when prices would rise.

“They were really understanding. My regulars told me they’d still buy as the products are worth it,” she says.

4. Remember you’re worth it

Paterson, at State 11, found putting up prices “scary”, but says that the response was better than expected.

“Putting up prices has actually meant we are busier as when our prices were lower people assumed we weren’t much good,” she explains. “People expect to pay for good quality.”

So, hold your head up high when raising prices and focus on giving your customers what they need, at a price that you can afford.

More on this: our ultimate pricing strategy guide has more information on how to set prices that will keep the business growing, while still keeping stakeholders and customers happy.

Rosie Murray-West

Rosie Murray-West is a freelance journalist covering all aspects of personal finance, as well as business, property and economics. A former correspondent, columnist and deputy editor at The Telegraph, she now writes regularly for publications including the Times, Sunday Times, Observer, Metro, Mail on Sunday, and Moneywise magazine.